SEC Risk Alert Notes Deficiencies in ESG Investing Processes

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Stinson - Corporate & Securities Law Blog

The SEC Division of Examinations has issued a Risk Alert to highlight observations from recent exams of investment advisers, registered investment companies, and private funds offering ESG products and services.

According to the Risk Alert, during examinations of investment advisers, registered investment companies, and private funds engaged in ESG investing, the staff observed some instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks. The staff noted, despite claims to have formal processes in place for ESG investing, a lack of policies and procedures related to ESG investing; policies and procedures that did not appear to be reasonably designed to prevent violations of law, or that were not implemented; documentation of ESG-related investment decisions that was weak or unclear; and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials.

The Risk Alert provides additional thoughts in various areas which include:

  • Portfolio management practices were inconsistent with disclosures about ESG approaches.
  • Controls were inadequate to maintain, monitor, and update clients’ ESG-related investing guidelines, mandates, and restrictions.
  • Proxy voting may have been inconsistent with advisers’ stated approaches.
  • Unsubstantiated or otherwise potentially misleading claims regarding ESG approaches.
  • Inadequate controls to ensure that ESG-related disclosures and marketing are consistent with the firm’s practices.
  • Compliance programs did not adequately address relevant ESG issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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